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Using a Partnership to Change FHL income?

Can a Partnership be used to Change FHL income?

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A potential client has approached who hold a FHL in husbands name.  As the FHL is solely in husband's name the income can not be split between husband and wife, the wife is a lower tax payer.  To counteract this and transfer income onto the wife they have set up a partnership and are transacting the income through the partnership and altering the split of profits to the wife.  Albeit I cant find any direct examples of this being excluded in my head it doesnt sit right.  The property is not owned by the partnership (its the husband) yet the income and profits are being diverted through the partnership to enable the split to be altered to minimise the tax liability.  Would this not constitute Tax Avoidance?  Can the income and profits be attributed to the partnership when the ownership is with only the husband?  The logic is that the husband brings the property and the wife puts in the work (management) therefore she retains the greater share but in essence the vehicle is just being used to artificially re-direct profits.  What are your thoughts?  Can anyone direct me to any legislation that would either support or oppose this?

Many Thanks

Replies (20)

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By Justin Bryant
25th Aug 2021 13:31

I see no problem here per se as it's essential an opco, propco structure, as long as you remember a person cannot contract with themselves and the settlements legislation may apply if wife (unlike in Arctic) is not getting a corresponding underlying outright gift of an income generating asset (to the extent she's getting an income gift (bounty) to cause a settlement in the 1st place).

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Replying to Justin Bryant:
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By Paul Crowley
25th Aug 2021 13:32

I think more like a layman
Hubby can write on a piece of paper that he gifts his X% beneficial interest to wife out of love and affection and the partnership becomes pointless.
In a parnership Partner A could commit to liabilties and partner B becomes insolvent with Partner A

@OP
Assumed clients did this all on their own having watched a youtube tax planning video

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Replying to Paul Crowley:
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By Justin Bryant
25th Aug 2021 13:38

Yes; I agree (the "love & affection" bit is unnecessary though), although a p-ship allows more flexibility re % income shares. I was just answering the question asked and there may be good reasons why they don't want to do joint ownership.

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Replying to Paul Crowley:
By tracyannw
25th Aug 2021 15:10

Paul I am not sure whether they have had advice or not but I am guessing not.

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Replying to Justin Bryant:
By tracyannw
25th Aug 2021 15:08

Justin, many thanks for your response it has clarified my thinking. I understand your logic re the opco/propco similarity however with companies it would not necessarily result in differing tax rates as its likely both companies are on the same tax rate (albeit that may change in the near future). With it being personal ownership and a partnership it is diverting profits from a potential high rate tax payer to one within a personal allowance therefore in my head it is different from opco/propco? Settlements Legislation was my thinking I just couldn't think of the correct terminology. In my head this situation would be caught under the settlements legislation as the ownership is 100%H while the income is eventually split 10%H / 90%W. I understand where there is a commercial reason for the diversion it can be justified but the management of the property surely does not outweigh the ownership of the asset at 90/10?

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Replying to tracyannw:
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By Justin Bryant
25th Aug 2021 15:15

Yes; I think you understand the key issues. HMRC & the courts generally respect 3P consideration agreed on arm's length terms and the absence of that is the key issue here, opening the door to a potential settlements challenge.

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By The Dullard
25th Aug 2021 13:28

There is no legislation, but it's probably a sham. If they had a deed of trust (which would then need to be registered with HMRC's Trust registration "Service") saying that the husband held the property for the benefit of them both, then they wouldn't need the partnership and they could split FHL profits however they like.

*Lurks with a rocket-launcher waiting for someone to mention s 836*

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By bettybobbymeggie
25th Aug 2021 16:00

Sounds fine to me. If you have any farming clients you'll see farms owned by oldies in their 80s, often long retired. Children and grandchildren now work the farm so the oldies no longer get the lion's share of the profits.

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Replying to bettybobbymeggie:
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By Tax Dragon
25th Aug 2021 22:01

Farming is a trade. FHL is income from property. There's no comparison.

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Replying to Tax Dragon:
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By bettybobbymeggie
26th Aug 2021 08:27

They are comparable in the sense that each represent an asset owned by party A but where, under the guise of a partnership, the profits are diverted to party B.

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Replying to bettybobbymeggie:
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By Tax Dragon
26th Aug 2021 10:55

Profits from farming go to the farmers. Income from property goes to the property owner. (Unless there's a GWR... oh, sorry, wrong thread.)

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By nick farrow
26th Aug 2021 10:18

managing FHLs can be a big job - can the husband not legitimately pay the wife a salary or fee to at least mitigate the tax on him - if the FHL is not managed externally then say 30% of gross income would not be unreasonable

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Replying to nick farrow:
By tracyannw
26th Aug 2021 11:20

Nick that was exactly my thoughts and the suggestion that I have put forward to the client. Albeit there would be the added implication of NI on employment income so it would be more expensive in tax regards a partnership it would be much easier to justify under settlements legislation as a legitimate diversion of income.

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Replying to nick farrow:
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By Hugo Fair
26th Aug 2021 11:22

We don't know the numbers ... but would you expect the husband (in this case) to be happy paying 30% of gross income to an unrelated 3rd-party just to manage the FHL(s)?

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Replying to Hugo Fair:
By tracyannw
26th Aug 2021 12:09

Hugo we are not talking huge numbers as its only one small part of their overall income streams (which further complicates matters). I am actually suggesting a fixed wage payment to the wife or if they are really insistent on a % then to do some market research on what the going rate is for managing a FHL which will be much more justifiable than the 10/90 split in favour of the wife. As you say no-one would employ a FHL management agent that takes 90% of your profits!

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Replying to tracyannw:
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By nick farrow
26th Aug 2021 16:01

30% of gross including VAT is not uncommon for full service of FHL i understand

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By Tax Dragon
26th Aug 2021 17:40

One wonders why they haven't put the property into joint names.

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Replying to Tax Dragon:
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By Hugo Fair
26th Aug 2021 19:37

Careful, you're falling into my usual trap ... of asking the question that wasn't raised by OP (even if it's probably the most pertinent and obvious 'elephant in the room')!

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Replying to Hugo Fair:
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By Tax Dragon
26th Aug 2021 20:13

Dragons, like chameleons, can change their spots. It's a skill more 'advanced' animals such as leopards, and indeed elephants, have lost.

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Replying to Hugo Fair:
By tracyannw
26th Aug 2021 20:31

Its a obvious question to ask my best guess is that proper advice was not given prior to the transaction being undertaken. The problem now is that the property is tied to a fixed rate mortgage with penalties for early settlement so transfer to joint names at this point is not a viable option but we have discussed this as a focal point for the future.

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